Conventional or FHA Loans: Which Is Right for You?

Whether you’re looking to buy a new home or refinance your mortgage, there are many loan options available on the market. Two of the most popular options are conventional loans and FHA loans.

Both types of loans have their advantages and disadvantages, depending on your circumstances. With that in mind, let’s go over these two types of loans and figure out which one might be best for your situation.

Conventional Loans

As the name would suggest, these loans are basically the bread and butter of the mortgage world. Conventional loans, sometimes referred to as agency loans, are mortgages offered through Fannie Mae or Freddie Mac, government-sponsored enterprises (GSEs) that provide funds for mortgages to lenders.

Conventional loans have a higher bar for approval than other types of loans do. They tend to be good for borrowers with good credit and a low debt-to-income (DTI) ratio who can make a down payment of 20%, as this allows them to avoid paying for private mortgage insurance (PMI).

However, conventional loans also allow down payments as low as 3%. With any down payment less than 20%, you’ll have to pay for PMI until you reach 20% equity in your home. There are also options for lender-paid mortgage insurance (LPMI), where you either make a one-time lump-sum payment at the start of your loan or take on a higher interest rate in exchange for the lender paying for your mortgage insurance.

To qualify for a conventional loan, you’ll need a credit score of at least 620 and a DTI no higher than 50% (ideally, it should be lower so you get better loan terms).

Pros

Flexibility in terms – can select any repayment period between 8 and 30 years

Can be used to buy primary residences, vacation homes and investment properties

Cons

Harder to qualify for than other loan types

Paying for PMI with down payments lower than 20%

FHA Loans

FHA loans are government-backed home loans insured by the Federal Housing Administration. They have slightly less stringent qualification standards, making them a good choice for first-time home buyers or borrowers with less-than-ideal credit.

The minimum down payment for an FHA loan is 3.5%. With FHA loans, you’ll pay for mortgage insurance (referred to as mortgage insurance premium, or MIP, for FHA loans) for the life of the loan if you make a down payment less than 10%. With down payments of 10% or more, you’ll make MIP payments for 11 years. However, once you have 20% equity in the home, you can refinance into a conventional loan, where you won’t pay mortgage insurance.

With an FHA loan, borrowers with credit scores of 580 or higher can qualify for a loan. Additionally, if you have a higher DTI (no higher than 50%), you may still qualify if you prove to be creditworthy in other areas, such as having a good credit score or being able to make a large down payment.

Pros

Easier to qualify for

Allows lower down payments

Accepts lower credit scores

Accepts higher DTI in certain cases

Cons

With a minimum down payment, requires MIP for the life of the loan, or 11 years for a down payment of 10% or more

Upfront mortgage insurance premium (1.75% of the loan amount)

Less term flexibility (15-, 20-, 25- and 30-year options)

Not available for second homes or investment properties

Which One Should You Choose?

To figure out which one is best, you need to consider your situation. If you’re a first-time home buyer with just alright credit and a high DTI, you may find that an FHA is your best, or only, option. If you don’t have the cash to make a large down payment but are able to qualify for a conventional loan with a smaller down payment, compare the interest rates and the insurance costs you’d take on with each type of loan. Once you know what the overall costs would be over the lifetime of the loan, you’ll be able to decide which one will likely work best for your needs and budget.

There’s no one-size-fits-all loan. If you’re still having trouble figuring out what’s right for you, speak with a financial advisor. They’ll be able to look at your options and make a recommendation that’s based on your personal financial circumstances and goals.

If you’re ready to get started, you can do so online through Rocket Mortgage® by Quicken Loans. If you’d rather get started over the phone, give us a call at (800) 785-4788. Still on the fence? We can help answer your questions in the comments below.

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This Post Has 21 Comments

I have a question regarding down payments. We have a house that’s paid for and we are now thinking about the possibility of purchasing our forever home. The property value is around $70,000. Could this property be used as a down payment for purchasing another home?

The only way to do that and keep the current property would be to do a cash-out refinance on the current property. However, the way this is typically handled is that you sell the property and use it as a down payment. The way you would do this is that you make any offers on your new home contingent on the sale of your previous property. If you want to look into your loan options online, you can do so through Rocket Mortgage®. You can also give one of our Home Loan Experts a call at (888) 980-6716. Hope this helps!

Unfortunately, we don’t finance manufactured homes. We do finance single-family homes, multi-family homes up to four units, condos, site condos, planned unit developments (PUDs) and townhouses along with modular homes. We also finance co-ops in New York. If you’re still interested, you can apply online with Rocket Mortgage or give one of our Home Loan Experts a call at (888) 980-6716. Hope this helps!

You’ve now waited long enough that you should have all loan options open to you except for jumbo loans. Of course, this refers only to the bankruptcy factor and there are other factors involved in loan approval. If you want, you can get started online with Rocket Mortgage or give one of our Home Loan Experts a call at (888) 980-6716. Hope this helps and have a great day!

I’m going to recommend you reach out to one of our Home Loan Experts at (888) 980-6716 to go over your situation. There are sometimes restrictions on how much of the property can be used for commercial endeavors. Additionally, there can only be minimal farming done on the land if you plan to use any of it for that. But I recommend you talk to someone who can go over your personal scenario more fully to get the best possible option for you. Have a great day!

My Wife and I had a foreclose, and it will be closed 3 years according to my credit report it shows June 11, 2015. I was wondering when we could start applying for a FHA loan knowing how long the process can be. We are wondering what we qualify for, our credit scores are in the high 680 and 690 with perfect payments history except the house ( our only blemish ).

You’re allowed to apply for a loan through FHA starting three years after foreclosure, which would be June 11. I’m going to recommend you speak with one of our Home Loan Experts at (888) 980-6716. They would be able to go over any and all potential options you would have.

Hello,
I am so confused by the new FHA guidelines on student loan payments. If I am on an extended repayment plan, with full amoritization by the end of my extended plan, is that monthly payment amount used, or is a percentage of my total debt used for DTI purposes.

If you can show documentation that the full loan will be paid off by the end of the plan and your payment won’t change, we can use the payment on your statement. Hope this helps! If you have further questions, you can call (888) 980-6716.

Hello,
I had a question regarding loans. We have a chapter 13 in our past. We finished payments with an order of discharge in December of 2015, however it was granted July 2016 (from what I have been told they always have to wait about 6 months to finalize it). From which date do we have to wait the 2 years to do a conventional loan? The order of discharge or the date it was actually granted?

That’s a good question that I’m going to admit I don’t have the answer to. My gut tells me it would be the date the discharge is finalized (July), but I don’t know enough about bankruptcy to know that for sure. One of our Home Loan Experts could probably give you more information if you call (888) 980-6716. Given the time frames you’re referencing, we may have a couple of options for you anyway, regardless of discharge date. They would be able to go over those with you.